A partnership is similar to a proprietorship, except there is more than one owner. A partnership, like a proprietorship, pays no income taxes. Instead, individual partners include their share of profits or losses from the business as part of their personal taxable income. One potential advantage of this business form is that, relative to a proprietorship, a greater amount of capital can often be raised. More than one owner may now be providing personal capital, and lenders may be more agreeable to providing funds given a larger owner investment base.
In a general partnership all partners have unlimited liability; they are jointly liable for the obligations of the partnership. Because each partner can bind the partnership with obligations, general partners should be selected with care. In most cases a formal arrangement, or partnership agreement, sets forth the powers of each partner, the distribution of profits, the amounts of capital to be invested by the partners, procedures for admitting new partners, and procedures for reconstituting the partnership in the case of the death or withdrawal of a partner. Legally, the partnership is dissolved if one of the partners dies or withdraws. In such cases, settlements are invariably "sticky," and reconstitution of the partnership can be a difficult matter.
In a limited partnership, limited partners contribute capital and have liability confined to that amount of capital; they cannot lose rnore than they put in. There must, however, be at least one general partner in the partnership, whose liability is unlimited. Limited partners do not participate in the operation of the business; this is left to the general partner(s). The limited partners are strictly investors, and they share in the profits or losses of the partnership according to the terms of the partnership agreement. This tlpe of arrangement is frequently used in linancing real estate ventures.